Optimal price promotion in the presence of asymmetric reference-price effects

Gadi Fibich, Arieh Gavious and Oded Lowengart
Additional contact information
Gadi Fibich: Tel Aviv University, Tel Aviv, Israel, Postal: Tel Aviv University, Tel Aviv, Israel
Arieh Gavious: Ben Gurion University, Beer-Sheva, Israel, Postal: Ben Gurion University, Beer-Sheva, Israel
Oded Lowengart: Ben Gurion University, Beer-Sheva, Israel, Postal: Ben Gurion University, Beer-Sheva, Israel

Managerial and Decision Economics, 2007, vol. 28, issue 6, pages 569-577

Abstract: In this study we demonstrate how a reference price may affect the degree of price rigidity|flexibility. For this, we construct a model of reference-price formation, which we use to analyze the effect of asymmetric reference price (cut 'effects') on the profitability of price promotions. We derive explicit expressions for the additional profits earned during a promotional period due to consumer perception of a 'gain', and for the post-promotion loss of potential profits due to consumer perception of a 'loss'. We show that when effects of losses on demand are greater than effects of gains ('loss aversion'), price promotions always lead to a decline in profits. When, however, effects of gains are larger than those of losses, price promotions, as well as reverse price promotions (i.e. price increase) can be profitable. In the latter case we calculate the optimal depth and duration of a price promotion. We also show that reference price can affect price rigidity and flexibility. Copyright © 2007 John Wiley & Sons, Ltd.

View list of references View citations in EconPapers

Downloads: (external link)
http://hdl.handle.net/10.1002/mde.1333 Link to full text; subscription required (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this article

Managerial and Decision Economics is edited by Paul H. Rubin

More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd.
Series data maintained by Christopher F. Baum ().